This blog post is the ultimate beginners guide to sinking funds. In this comprehensive blog post I share everything you need to know in order to create your own sinking funds and start saving more money than ever before. I’ll tell you exactly what you need to know about sinking funds and show you how to set them up properly.
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Do you want to know what Sinking Funds are?
Do you want to know why they are one of the key ingredients to ensure you are able to effectively balance and manage your budget?
Well you’ve come to the right place!
In this blog post, I’ll share a beginners guide to Sinking Funds. I’ll tell you exactly what you need to know about sinking funds and show you how to set them up properly.
It’s 8:45 am, you bundle all 3 children into the car and hurry as fast as you car down the road without breaking the speed limit. You’re panicking because school starts at 8:55 and you don’t want the children to be late.
In your haste you didn’t see that large broken glass bottle and drove full speed over it before hearing a huge pop. Just like that without any warning you now need to buy two new tyres. The money to pay for this would come out of your Emergency Fund as it is an unplanned expense.
Sinking Funds on the other hand are pots of savings for specific planned events. Put simply a Sinking Fund is money set aside over a period of time to fund a future expense.
Emergency Fund is for unplanned expenses
Sinking Fund is for planned expenses
Sinking Funds can literally be used for anything. Here are just some ideas of things you could create a Sinking Fund for, but they are by no means limited to this list:
Let’s take Christmas for example. It’s the 1st of January 2021 and you’ve decided that this year you will save up and pay cash for Christmas. You sat down and did the maths and calculated that the total that you need to pay for Christmas 2021 will be £1,100.
There’s a total of 11 paydays between 1st January 2021 and Christmas 2021. In order to ensure you’ve saved the complete Sinking Fund in time for Christmas, take the complete total of £1,100 and divide it by 11:
£1,100 / 11 = £100
Therefore, in order to have the full amount needed to pay for Christmas you need to save £100 every single month.
This is a basic formula based on the assumption that you are paid the same amount every month and are able to save the same each month.
In actual application, you may find that in some months you’re able to put £50 towards the Christmas Sinking Fund, and other months, you put £200 towards the Sinking Fund. The main thing is that come end of November 2021 you should have finished saving the complete amount that you need to pay for Christmas.
Sinking Funds have been a game changer for us when it comes to budgeting and managing our finances. Besides the most obvious benefit of saving money, there are also more great advantages to using this system for saving money.
Being in control of your finances really does give you peace of mind. Planning ahead and knowing what’s coming up, will help reduce anxiety and let you know exactly where all your money is going.
You can save a lot of money by using sinking funds. For example, a lot of subscriptions and insurance companies offer you a discount or month free when you pay for the whole year in one go instead of monthly. Also you have a lot more bargaining power when you’re paying for these things annually. That money saved can be put towards something else such as another sinking fund or savings account.
I’m sure I’m not the only one that’s been guilty of this. Your child’s birthday comes at the same time every year, yet it’s only a few days or weeks before the big day that you’re rushing around buying gifts and planning the party. This is often at a higher price and also not always the gift that the child actually wants. By planning ahead and saving the sinking fund, you already know what you have in mind for the gift and celebration and will be able to shop around for better deals.
I don’t know about you, but I’m a very goal oriented person. I love the satisfaction of achieving goals that I set myself. The beauty of sinking funds is that you break down a big goal into bite-sized goals. Every month when you put money towards the different sinking funds, you feel that sense of achievement and accomplishment. Sinking Fund Trackers are perfect tools to visualise your progress and keep you motivated to stay the course. Debt Free Charts have some great trackers that you can check out here.
There’s no better feeling than making a planned purchase with money you’ve saved up for yourself. You get to enjoy the feeling of making that purchase free from guilt. Knowing that the money is being used for its intended purpose, as opposed to you robbing Peter to pay Paul. There’s nothing worse than making a purchase and regretting that decision after due to poor planning and preparation.
So you like the idea of sinking funds but you’re thinking, I don’t have any spare money to start saving towards them. Fear not, I have some great suggestions of ways that you can make some extra money in order to start building your sinking funds today.
I do like a good challenge! Savings challenges are great ways to get started with saving money and developing good habits. You can do them individually or with a group to really keep you motivated to kick-start your sinking funds. One of my favourite savings challenges I’ve done is the 1p money saving challenge, you can download it here for free here.
Look around you, all those unwanted and unused items used to be money. You can turn it back into money by selling stuff from around the house that you’re no longer using. They say one man’s trash is another man’s treasure… I say turn your OWN trash into your OWN treasure!
If you’re ready this blog post then you have everything you need to make some extra money. There are countless side hustles that you can start all at the click of a button. For example you could, complete online surveys, user testing, mystery shopping, start a blog, start a YouTube channel, create art printables or set up your own online store. The options out there are limitless, the question is, are you willing to do what it takes to make it happen?
Or in other words reduce the number of times you eat out in a week. If it’s twice a week reduce it to once a week and send the money you would have spent on that meal to your sinking fund. While you’re at it, consider taking packed lunch to work a few days a week too and send the money saved to your sinking fund.
Admittedly this is something that I don’t do often enough, but one phone call could literally save you so much money. That money you save from switching can be used to start building your sinking funds.
I split my sinking funds into two categories; essentials and non-essentials. Essentials are the things I have to pay for every year regardless of how much money I have saved. Examples of this are car insurance and home insurance.
Non-essentials on the other hand are things like a new car and family holiday. While these are things we’d like to do every year, if push came to shove and we didn’t save the full sinking fund, we could delay these purchases until the full amount has been saved.
My current sinking funds are as follows:
How long is a piece of string? It really is up to you to decide how many sinking funds you want to have in a given year. My advice if your new to sinking funds would be to start small. Start with 2 to 4 sinking funds that are your biggest priority and build from there.
It’s really up to you how you want to save your money. Some people use the cash envelope system. They have envelopes with the different sinking fund categories written on them and regularly add money to the different cash envelopes.
You can also open up various online saver accounts for the different sinking funds. Between my husband and I we have over 14 savings accounts and we find that it works best for us having all the sinking funds in different accounts.
There are many ways to manage and track your sinking funds. It can be as simple as writing them all down on a piece of paper or a printable savings tracker. You could also use an Excel spreadsheet or Google sheets. The main thing is that you’re tracking all the sinking funds and know exactly how much is in each sinking fund at any point in time.
You can save your sinking funds up in separate accounts, but it is not absolutely necessary if you have the exact amounts noted down and keep your tracker up to date.
I hope you found this beginner’s guide to sinking funds useful. If you did, please let me know in the comments section below. Will you be setting up your own sinking funds? What are some of the sinking fund ideas that you have?
If you enjoyed this post, ’Beginners Guide To Sinking Funds′ then you will also enjoy my other blog posts on similar topics, check them out below:
Wife and mum of three boys on a journey to achieve financial freedom. Earn more, spend less and invest the difference.
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